Sunday, November 18, 2012

The Twinkie Defense - Classic Baiting Article

Twinkies will disappear forever! Oh my!

This week in the "news" both MSNBC and CNN competed for the number of stories they could do about the Hostess bankruptcy. Hostess, maker of the worst bakery products known to mankind, has been in bankruptcy court for some time now, the second time in four years. They were supposedly trying to work out a deal where they could emerge from bankruptcy and keep operating.

The background to the story is as familiar as it is unreported. The news media never reports the real machinations going on behind the scenes, but rather the surface story - and expects you to bite on the eye-candy, or in this case, the Twinkie.

Like Mitt Romney's Bain Capital, the management of Hostess loaded up the company with debt, likely with the express idea of running it into bankruptcy. In bankruptcy court, remember, the shareholders get wiped out, and the debtors now own the company ("debtor-in-possession") so sometimes it is better to be a bondholder than a shareholder, as I discussed before. By the way, I don't just put those hyperlinks in there for funsies. Read the articles linked, as they explain the scam in more detail.

In summary, it works like this:

1. Take control of company - you can do this by buying as little as 5% of the stock.

2. Load the company up with debt that you hold a majority of. Pay yourself a bonus out of that debt.

3. Pay yourself onerous interest payments on that debt. By now you have been paid back at least twice.

4. Drive the company bankrupt due to all that debt.

5. In bankruptcy court you:

(a) strip off the unfunded pension liabilities to the government,
(b) give the retirees 40 cents on the dollar on their pensions,
(c) cut health care entirely for retirees,
(d) wipe out the shareholders entirely,
(e) rewrite all contracts, including but not limited to, union agreements, patent licensing agreements, leases, etc.,
(f) stiff all your suppliers or give them pennies on the dollar or new stock,
(g) emerge from bankruptcy as majority shareholder in the new, stripped down company, and
(f) do an IPO and sell stock to other folks, completely cashing out before it goes bust, yet again.

Yes, this is not as swell as narrative as "I created jobs in the private sector!" It requires you to think coherent thoughts for more than 15 seconds at a time. And the above will not fit on a t-shirt or bumper sticker. But this is what Bain did. This is what Friendly's ice cream did. This is what Sears is apparently trying to do, and J.C. Penny seems poised to do. And it appears that it is what Hostess was trying to do - or is going to do.

This is not "wealth creation" or "job creation" but rather the inverse. Little people - you and I - get screwed in a number of ways:

1. We lose our investments in the stock.

2. We lose our pensions if we worked there.

3. We lose our income - often wages are cut in half.

4. We lose the money we are owed, if we were creditors.

These schemes do represent risk, to some extent, for the vulture investors, just as knee-capping someone involves risk for a mafia hit man. He might break a nail or something - or get caught. Neither are likely, however.

And there are some interesting variations on this theme, of course.

For example, the GM bankruptcy wiped out shareholders (including me) and also a lot of suppliers didn't get paid all they were due. And wages for the auto workers were slashed, and a lot of work rules, such as the one stipulating that GM never lay anyone off, ever, were abolished.

But the big difference with the GM bankruptcy was that instead of handing over the company to the bondholders and screwing the UAW pension plan, the pensions were preserved, and the bondholders screwed. And this was what pissed off Mitt Romney. After all, that is not how the game of "vulture capitalism" is played! No fair actually helping the little guy at the expense of billionaires!

The Mohegan Sun situation was also unusual. They did not go bankrupt, likely because they couldn't. As only "Native Americans" could hold stock, bankruptcy would not allow bondholders to become debtors-in-possession. Instead, a deal was reached with bondholders to give them new bonds. In retrospect, a pretty sweet deal, too! I wished I had wagered a little on that casino!

But that is just the background. And if you don't understand how the Vulture Capitalism game is played, and you get your information from 15-second sound bites on Fox News, well, you might think Mitt Romney created jobs and your precious Twinkies are going away forever.

But neither is true. Hostess tried to negotiate a deal in bankruptcy court where all the union workers would take a hit. And even my former union, the Teamsters, went along with this. But the Baker's Union, perhaps realizing that being a patsy in these sorts of deals, over and over again, was short-sighted, said "enough".

And so management dropped the L-bomb. Liquidaion. Rather than reorganize in bankruptcy, they would dissolve the company, sell off the assets and let the company fly to the wind.

Of course, it ain't happened yet. The company cannot just decide to liquidate in bankruptcy. The bankruptcy court Judge has to agree to this. And he may say "No", particularly if the liquidation threat is just that - a tactical maneuver designed to get the bakers to the bargaining table.

But that didn't stop CNN and MSNBC from shouting "Twinkies are gone forever!" and for CNN to even suggest, in one headline that you start hoarding Hostess baked goods. This is irresponsible journalism at its worst.

Even if the bankruptcy court approves liquidation, what happens then? No, Twinkies don't go away then, either. The assets of the company are sold off and the creditors paid. Who are the creditors? Largely the bondholders - plus some unpaid suppliers. What happens in then? Two possible scenarios.

First, like with a foreclosure, the "buyer" for all these assets ends up being the bondholders - likely management or people closely linked to existing management. They buy the best assets (and allow the plants they wanted to close to be sold to someone else, or if they have to buy as a package, they spin these off quickly) and start a new company. And these assets include the Trademarks and the underlying goodwill - the "Intellectual Property" so to speak. So the bondholders get all the equipment, plants, and rights to make Twinkies. And they hire non-union labor to run these factories. This is even a better deal for them than rewriting union contracts - NO UNION CONTRACTS WHATSOEVER!

Like I said, Vulture Capitalism can be a fun game to play.
A second outcome is possible, although less likely. The assets might be sold to other folks - competitors in the marketplace, who may want the factories and more importantly, the rights to the Trademarks and the products. Since there is a market for this crappy food, likely someone will snap this up. The bondholders will get paid out of the money made from selling these assets - but they likely will not get as much.
And that is why I say it is a less likely scenario. If you are a bank and hold a note for $200,000 on a foreclosed house, you are not letting it be sold on the courthouse steps for $50,000. You buy it for up to the amount you are owed - essentially buying it back from yourself, and hope to sell it for more.

Similarly, the Hostess bondholders will likely end up the highest bidders for the Hostess assets - if the bankruptcy judge allows liquidation, which is a big "If". You see, he likely sees through this whole charade, and will say to management, "Request denied, and by the way, you are all fired" as the management is not acting in the best interests of the company.

Either way, though, your precious Twinkies are safe.

But what about the "18,000 jobs" that will be "lost" as a result of this liquidation? Again, you are being baited and in the worst sort of way. First of all, it is not a done deal. The company may still re-emerge as a reorganized company, and as a result, most of these jobs will be salvaged - albeit at lower wages. Second, even if the company liquidates, it is likely that the new buyers will continue to operate the plants, re-hiring the workers, albeit again, at lower, possibly non-union rates. Even if the plants are closed and production consolidated to other, competing companies, these companies will likely hire more people to make these nasty snack treats. No matter how you slice it, the folks working at Hostess will end up working for a reorganized Hostess, a new company built from the assets of the old company, or for a competitor's company.

The idea that people will stop eating Twinkies and jobs will be "lost forever" is just nonsense. Although it wouldn't hurt if people ate less Twinkies, if you think about it. And of course, some people will lose their jobs over this - likely when reorganized under a new union contract (or no union contract) management will pare the number of people working. But the idea that simply everyone will lose their job is just idiotic. Unfortunately, the jobs that are sure to stay in place are that of existing management, as they likely will continue to run the company under the direction of the new owners - the existing bondholders. That is how the game is played.

Now, the point of this post is not about Twinkies or Hostess or Mitt Romney. The point is, if you read or watch CNN, MSNBC, or Fox News, likely none of the above was mentioned, or if it was, in passing only. It is not exciting as a video clip of some fat chick loading up her shopping cart with Ho-Hos, while the smiling anchors exchange witty quips about Twinkies and their waistlines.

No, instead, we are encouraged by CNN to start hoarding. And all the networks report the demise of the Twinkie as a done deal - at least initially. CNN started to walk-back the story, noting that the Twinkie would be around post-liquidation. But then they followed that with the headline encouraging hoarding.

This is not journalism - it is just eyeball-catching click-through revenue generation.

The point of this posting is, why would you believe stories in the pop media (Fox, NBC, CNN, etc.) when they are reported so poorly and in terms of short sound-bites? Yes, it takes more time to read the "long format" stories in the press, to really understand what is going on. But it is a better investment of your time.

Watching television does not make you more informed, but actually less so. And to act rationally in an irrational world, you need to have rational data. You ain't getting that from the TeeVee!

UPDATE: As I outlined above, the deal with these things is for the insiders to cash out, and I was not surprised to read on Snopes that this is exactly what is happening. The Bain way! The top executives raised their salaries by 2-3 times, while at the same time trying to slash those of the hourly workers. The President of this failing company is pulling in over two million dollars a year.

Oh, right. He's "creating jobs" using the free-enterprise system. We should all be worshiping him as a God.